The present invention relates generally to foreign currency exchange, and more particularly to generating and executing insurance policies for foreign exchange losses.
Rapidly expanding global commerce and international travel have dramatically increased the need for foreign currency exchange. Foreign exchange rates are highly variable, and numerous factors influence the exchange rates, such as economic strength of countries, political stability, countries' transnational policies and relationships, and demand for foreign currency. Due to high variability and numerous factors influencing the exchange rates, it is extremely difficult to predict future exchange rates even for a short period.
Due to the unpredictable nature of the exchange rates, individual travelers may wish to lock in a favorable exchange rate before they travel to foreign countries, thus eliminating the need to purchase foreign currencies in advance. One way to protect against unpredictable fluctuation of exchange rates are forward currency contracts. These contracts give the buyer a right to purchase a certain amount of foreign currency at a specific price at a specific future time. Essentially, the buyer of the contract pays a premium for the right to purchase a large block of foreign currency at a fixed exchange rate.
Unfortunately, forward currency contracts involve large sums of money, and thus, are practical only for large institutions and international companies seeking to minimize currency exchange risks, or commercial currency traders. The size of forward currency contracts generally does not vary, nor can they be shared by a group of individuals. Additionally, there is little or no flexibility in specifying a range of coverage period because forward currency contracts must designate a specific date.
Accordingly, not only are these contracts restrictive, they do not offer avenues for individual consumers to hedge their personal currency risk. Instead, if individuals want to "lock in" a prevailing exchange rate, they must either purchase the foreign currency or an instrument denominated in the foreign currency, such as traveler's checks. The actual purchase, however, poses many disadvantages such as tying up funds, paying a commission, and foregoing the possibility of enjoying any favorable future fluctuations.
Therefore, it is desirable to provide a method of protecting individual consumers against unpredictable fluctuations of foreign exchange rates.
It is also desirable to offer a more flexible method for large entities to ensure against currency fluctuations.
It is further desirable to provide a method of foreign currency exchange rate protection through commonly accessible means such as credit cards or ATMs.